Title: Choosing investment wrappers
1Choosing investment wrappers
- Chair Liz HendersonTaxation and Trusts
Specialist, James Hay - Brian Murphy ACII, APFS, ATT, TEPHead of Tax and
Trusts, AXA Life
2Capital Gains Tax the reform
- A single rate of CGT at 18
- The withdrawal of taper relief
- The withdrawal of indexation allowance for
individuals and trustees - Measures came into effect for disposals made on
or after 6 April 2008 - Is this really a new idea?
3CGT and investments
Basic rate taxpayers
A 10 reduction in the rate of CGT from 20 to
18 .
. Or is it really a possible 50 increase in the
rate ?!
4Impact of the loss of taper relief for
investments held by basic rate tax payers
5Impact of the loss of taper relief for
investments held by basic rate tax payers
6Impact of the loss of taper relief for
investments held by basic rate tax payers
7Impact of the loss of taper relief for
investments held by higher rate tax payers and
trustees
8Impact of the loss of taper relief for
investments held by higher rate tax payers and
trustees
This represents a potential reduction in the tax
rate for higher rate tax payers and trustees of
anything between 25 and 55
9Types of tax wrapper
- Onshore life bond
- Offshore life or capital redemption bond
- UK collective (dividend paying)
- UK collective (interest paying)
- Offshore collective (distributor dividend
paying) - Offshore collective (distributor interest
paying) - Offshore collective (non-distributor roll -
up)
10Factors to consider
- Asset allocation
- Internal taxation of the wrapper
- External taxation of the investor
11Onshore bonds the funds
- The headline tax rate for a life fund is 20, but
- This rate is not applied to all investment return
components - The 20 tax rate can apply to all or none of the
investment return or a combination.
12The tax analysis
13Other tax aspects
- Stamp Taxes
- 0.5 on UK equities
- Up to 4 on real estate
- Realisation Basis
- Tax on growth in excess of RPI on equities and
real estate deferred until point of sale - Tax relief for expenses
14AXA Distribution Fund - historic tax profile
2007 2006 2005 2004 2003
Tax charge () 7.49 8.77 12.36 11.98 6.55
15Onshore bonds - investors
- Investors receive a notional basic rate tax
credit of 20 - Higher rate tax payers have to pay a further 20
of the net gain (maximum net rate is thus 36) - No additional liability for basic rate tax payer
- Non tax payer and 10 tax payer cannot reclaim
any tax - Top slicing relief available
16Offshore bonds the funds
- Life company generally pays no tax within the
fund - May be some non-reclaimable withholding tax
17Offshore bonds - investors
- The gain is taxed at the investors highest
marginal rate - Higher rate tax payers pay 40
- Basic rate tax payers pay 20
- Non tax payers and 10 tax payers can use up
those thresholds - Top slicing relief available
18Top-slicing issues
- On final encashment of both onshore and offshore
bonds, the top-sliced divisor is the number of
complete years that the bond has been in force - Top-slicing is only ever used for higher rate tax
purposes - Top-slicing can NEVER be used for age allowance
purposes
19Top-slicing issues - Onshore v Offshore
- For onshore bonds, on part surrenders, the
top-sliced divisor is taken from the date of the
last chargeable event - - e.g. if, 7 withdrawals are taken each
year, the top-sliced divisor will always be one - For offshore bonds, if 7 withdrawals are taken,
top-slicing always goes back to the start date of
the original bond, so the top - sliced divisor
increases each year
20UK collectives the funds
- Funds are exempt from UK tax on gains within fund
- UK dividends not liable to tax within fund
- Funds liable to 20 corporation tax on other
types of investment income - May be non recoverable overseas withholding tax
- Funds with more than 60 interest bearing assets
pay interest - Funds with less than 60 interest bearing pay
dividends
21UK collectives investors
- Dividend distributions are paid net of the
notional 10 tax credit - Higher rate tax payers pay a further 25 of the
amount received - Basic and starting rate tax payers have no more
tax to pay - Non taxpayers cannot reclaim the tax credit
- Income tax payable whether dividend reinvested or
not
22UK collectives investors
- Interest distributions have 20 tax deducted at
source - Higher rate tax payers pay a further 20 of the
grossed up distribution - Basic rate tax payers have no more tax to pay
- Starting rate and non taxpayers can reclaim the
tax deducted up to the thresholds - Income tax payable whether dividend reinvested or
not
23UK collectives investors
- Capital gains taxed at 18 flat rate for all
individuals and trustees - Annual CGT allowance (9,600 for 2008/9 may be
available). - Trustees get a maximum of half this allowance
care re life policy trusts and pensions trusts
24Offshore collectives the funds
- The fund will generally pay no tax
- There may be some non-reclaimable withholding tax
25Offshore collectives investors distributor
funds
- A distributor fund must distribute at least 85
of its income - Offshore fund dividend distributions are taxed at
10 for basic rate tax payers and 32.5 for
higher rate tax payers - Interest distributions are taxed in the same way
as for UK collectives - Capital gains are taxed at 18 and the CGT annual
exemption may be available
26Offshore collectives investors non
distributor funds
- Gains are charged at the investors highest
marginal rate - A higher rate tax payer pays 40 tax on gains and
interest received and 25 on dividends received - Basic rate tax payers pay 20 on any capital
gain, 20 on interest received and nothing on
dividends received - Non and starting rate tax payers can use up their
allowances - There is no top slicing relief
27So, what wrapper?
- Know your client and his or her attitude to risk
- Asset allocation different wrappers for
different asset classes? - Does your client need an income or is capital
growth the priority? - What is your clients current tax rate?
- What is it likely to be when the investment is
realised? - Death?
28Factors to consider - bonds
- Tax deferral 5 withdrawals
- Assignment of the investment
- Segmentation
- Switching how important
- Simplicity
- Age Allowance
- Long term care
- IHT planning
- Residency
- Trustees of Discretionary (or A M) trusts
29Factors to consider - collectives
- The CGT annual exemption
- Part disposals
- Assignment of the investment
- Switching how important
- Simplicity
- Residency
- Trustees of Interest in Possession trusts
30A final thought.
Change is inevitable except from a vending
machine
Robert C Gallacher
31Thanks to all our sponsors